Renewable Energy Tax Credit Lexicon
Novogradac’s Renewable Energy Tax Credit Lexicon offers definitions for terms used in the renewable energy tax credit (RETC) industry.
Closed-loop biomass is any organic material from a plant that is planted exclusively for use at a qualified facility to produce electricity.
Energy property does not include public utility property, passive solar systems or pool heating equipment. To qualify, the original use of the equipment must begin with the taxpayer or it must be constructed by the taxpayer. The equipment must also meet any performance and quality standards in effect at the time the equipment is acquired. The energy property must be operational in the year in which the credit is first taken. The equipment must fall into at least one of the following categories, the details of which are described in Treasury Regulations (Treas. Reg.) Section 1.48-9: alternative energy property, solar or wind energy property, specifically defined energy property, recycling equipment, shale oil equipment, and equipment for producing natural gas from geopressured brine. In cases where equipment, as installed and used by the taxpayer as prescribed above, meets more than one categorical requirement as described under Treas. Reg. 1.48-9, only one energy investment credit will be allowed.
Geothermal energy is energy derived from a geothermal deposit as defined by Internal Revenue Code (IRC) Section 613(e)(2).
Geothermal Energy Property
Geothermal energy property includes equipment used to produce, distribute or use energy derived from a geothermal deposit. Further, in instructions for Form 3468, the Internal Revenue Service says, “Geothermal energy property is equipment that uses geothermal energy to produce, distribute, or use energy as derived from a geothermal deposit (within the meaning of Section 613(e)(2)).” It does not include geothermal heat pumps. For electricity produced by geothermal power, equipment qualifies only up to, but not including, the electrical transmission stage.
Hybrid Solar Lighting Systems
Hybrid solar lighting systems are those that use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.
Hydropower production means the incremental hydropower production for the tax year from any hydroelectric dam placed in service on or before Aug. 8, 2005, and the hydropower production from any non-hydroelectric dam described in IRC Section 45(c)(8)(C).
Indian coal means coal which is produced from coal reserves which on June 14, 2005, were owned by an Indian tribe or held in trust by the United States for the benefit of an Indian tribe or its members.
Municipal Solid Waste
Municipal solid waste is solid waste as defined under paragraph 27 of 42 U.S.C. 6903. “Municipal Solid Waste doesn’t include paper which is commonly recycled and which has been segregated from other solid waste (as so defined).”
According to the IRS Notice 2006-88, “[IRC] Section 45(c)(3)(A) defines the term ‘open-loop biomass’ to mean: (a) any agricultural livestock (including bovine, swine, poultry, and sheep) manure and litter, including wood shavings, straw, rice hulls, and other bedding material for the disposition of manure (agricultural livestock waste nutrients); or (b) any solid, nonhazardous, cellulosic waste material or any lignin material which is segregated from other waste materials and which is derived from-- (i) any of the following forest-related resources: mill and harvesting residues, precommercial thinnings, slash, and brush; - 3 - (ii) solid wood waste materials, including waste pallets, crates, dunnage, manufacturing and construction wood wastes, and landscape or right-of-way tree trimmings; or (iii) agricultural sources, including orchard tree crops, vineyards, grain, legumes, sugar, and other crop by-products or residues.”
Poultry waste is poultry manure and litter, including wood shavings, straw, rice hulls and other bedding material for the disposition of manure.
According to IRS Notice 2009-90: “Except as otherwise provided by section 3.01, the term “refined coal” means fuel that – (a) is a liquid, gaseous, or solid fuel produced from coal (including lignite) or high carbon fly ash, including (except to the extent inconsistent with section 3.01(1)(b) of this notice) such fuel used as feedstock. (b) is sold by the taxpayer (producer), to an unrelated person, with the reasonable expectation that it will be used for the purpose of produce steam; and (c) is certified by the taxpayer as resulting (when used in the production of steam) in qualified emission reduction.”
Renewable Energy Investment Credit
IRC Section 48 provides an investment tax credit for solar projects. The ITC is equal to 30% of the cost of the facility, with bonus tax credit available for investments meeting certain domestic content and energy community requirements. For more information on the ITC see Novogradac’s “About Renewable Energy Tax Credits” section of this website.
Renewable Electricity Production Credit
IRC Section 45 provides a production tax credit to owners or operators of electric generation facilities that produce electricity from “qualified energy resources.” These include wind, biomass, geothermal, solar, irrigation, solid waste and hydropower. The PTC is based on the amount of electricity produced by the facility and is currently 2.6 cents per kilowatt hour over a 10-year period, with bonus tax credit available for investments meeting certain domestic content and energy community requirements. For more information on the PTC see Novogradac’s “About Renewable Energy Tax Credits” section of this website.
Resources means wind, closed-loop biomass, poultry waste, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, hydropower production, refined coal and Indian coal.
Small Irrigation Power
Small irrigation power is power generated without any dam or impoundment of water. Further, according to Internal Revenue Bulletin: 2009-19, “Section 45(d)(5) defines a qualified facility using small irrigation power to produce electricity as any facility owned by the taxpayer which is originally placed in service after the date of enactment of IRC Section 45(d)(5) and before January 1, 2014.”
Solar Energy Property
According to the IRS in a 2014 private letter ruling: “In general. Energy property includes solar energy property. The term “solar energy property” includes equipment and materials (and parts related to the functioning of such equipment) that use solar energy directly to (i) generate electricity, (ii) heat or cool a building or structure, or (iii) provide hot water for use within a building or structure. Generally, those functions are accomplished through the use of equipment such as collectors (to absorb sunlight and create hot liquids or air), storage tanks (to store hot liquids), rockbeds (to store hot air), thermostats (to activate pumps or fans which circulate the hot liquids or air), and heat exchangers (to utilize hot liquids or air to create hot air or water). Property that uses, as an energy source, fuel or energy derived indirectly from solar energy, such as ocean thermal energy, fossil fuel, or wood, is not considered solar energy property.”
Subsidized Energy Financing
Subsidized energy financing means “financing provided under a federal, state, or local program, a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy.” Under IRC Section 48, if a project is financed in whole or in part by subsidized energy financing or by tax-exempt private activity bonds, a business must reduce the basis for calculating the credit by the amount of any such incentives received.